Volkswagen will invest $600 million and create 2,000 new jobs to produce a new sport utility vehicle in Hamilton County.
Also, the company will build a new research and development center that will employ 200 in Chattanooga, the company announced today in a news conference in Germany.
Martin Winterkorn, VW's chief executive, said plans are to start production in late 2016 to produce the seven-seat SUV dubbed the CrossBlue that was unveiled in the 2013 Detroit auto show.
"The USA remains one of the most important markets for the VW brand," he said.
U.S. Sen. Bob Corker, R-Tenn., said the action will impact thousands of lives in the Chattanooga area.
"It will affect people for years to come and thousands more indirectly," he said.
Gov. Bill Haslam said the R&D center is "a new day" in Tennessee in that there will be more than just production jobs in Chattanooga.
"This speaks volumes for VW being as close to the customer at it can be," he said.
Michael Horn, VW of America's CEO, said the new SUV will be bigger than the VW Tiquan and have more seats than the Touareg SUV.
He cited the quality of the craftsmanship at the Chattanooga plant, where VW employs about 2,700 people.
Christian Koch, who heads VW's Chattanooga operation, said the new R&D center will house professionals with expertise in design.
"There will be many more annoucements related to hiring and construction activities," he said.
Hamilton County Mayor Jim Coppinger said the county is "pleased to partner with Volkswagen as they create 2,000 new family-wage jobs which will also generate very positive economic ripple effects for residents throughout our community. By working with Volkswagen to build on the tremendous success of their initial job creation project, we are establishing a foundation for continuing economic growth for years to come."
Chattanooga Mayor Andy Berke said Volkswagen is one of Chattanooga's largest and most valued employers.
"This expansion will result in a huge capital investment and thousands of new jobs," Berke said. "From day one, the city and county have worked hard to see today become a reality, when we can announce that Volkswagen will be adding more jobs, more investment and expanding their presence in Chattanooga."
In the summer of 2008, Volkswagen announced the Passat would be built in Chattanooga.
Last year, a University of Tennessee at Knoxville study showed that Volkswagen Chattanooga had created 12,400 full-time jobs, is responsible for $643.1 million in annual income and has attracted 17 supplier companies to the area. This new investment will add a second line to the existing manufacturing facility.
Volkswagen, the biggest car maker in Europe and the fastest growing auto manufacturer in China, has struggled in the U.S. market where car sales so far this year are down 13 percent from a year ago.